What do
the short run marginal cost, average variable cost and short run
average cost curves look like?
What do the short run marginal cost, average variable cost and short run average cost curves look like?
The short
run marginal cost (SMC), average variable cost (AVC) and short run
average cost (SAC) curves are all U-shaped curves. The reason behind
the curves being U-shaped is the law of variable proportion. In the
initial stages of production in the short run, due to increasing
returns to labour, all the costs (average and marginal) fall. In
addition to this in the short run MP of labour also increases, which
implies that more output can be produced by per additional unit of
labour, leading all the costs curves to fall. Subsequently with the
advent of constant returns to labour, the cost curves become constant
and reach their minimum point (representing the optimum combination
of capital and labour). Beyond this optimum combination, additional
units of labour increase the cost, and as MP of labour starts
falling, the cost curve starts rising due to decreasing returns to
labour.
The short run marginal cost (SMC), average variable cost (AVC) and short run average cost (SAC) curves are all U-shaped curves. The reason behind the curves being U-shaped is the law of variable proportion. In the initial stages of production in the short run, due to increasing returns to labour, all the costs (average and marginal) fall. In addition to this in the short run MP of labour also increases, which implies that more output can be produced by per additional unit of labour, leading all the costs curves to fall. Subsequently with the advent of constant returns to labour, the cost curves become constant and reach their minimum point (representing the optimum combination of capital and labour). Beyond this optimum combination, additional units of labour increase the cost, and as MP of labour starts falling, the cost curve starts rising due to decreasing returns to labour.
